Back on Track

Obama and jobs

A few hours before President Obama presented his new job-creation plan to Congress last week, Ben Bernanke, the chairman of the Federal Reserve, made a less ballyhooed appearance, before the Economic Club of Minnesota. Bernanke reminded his audience that it has been exactly three years since the financial crisis that attended the collapse of Lehman Brothers. Then he pointed out that the recession that Obama had inherited from his Republican predecessor was even more calamitous than had previously been thought. Recent revisions to government statistics show that, between the end of 2007 and the second quarter of 2009, the Gross Domestic Product declined by more than five per cent—the deepest drop since the Second World War.

Obama didn’t refer to Bernanke’s update, but knowing the true magnitude of the collapse is critical to understanding the economic and political context in which the President spoke: nine per cent unemployment (sixteen per cent if you include people who have given up looking for a job, and those who can find only part-time work) and a widespread belief that the Administration’s first stimulus package, the seven-hundred-and-eighty-seven-billion-dollar American Recovery and Reinvestment Act of 2009, was a failure. To quote Governor Rick Perry, of Texas, in last Wednesday’s Republican debate, Obama “has proven for once and for all that government spending will not create one job.”

The record demonstrates no such thing. A chart showing fluctuations of the G.D.P. over the past few years indicates a modest recovery beginning in the middle of 2009, just as the stimulus dispersals were kicking in; the recovery continuing at a decent clip for more than a year; and a severe tapering off toward the end of 2010, by which time most of the stimulus money had been spent. A visiting Martian looking at the chart might well conclude that but for the stimulus things would have been much worse, and that conclusion would be justified. Based on estimates from the nonpartisan Congressional Budget Office, by the end of 2010 the stimulus had created close to three million jobs, which is not far off the outcome that White House economists predicted in early 2009. The problem is that those economists, working with the figures available at the time, grossly underestimated the collapse in spending and hiring which the country was facing, and the scale of government action that would be needed to offset it. They rashly claimed that the stimulus would prevent the unemployment rate from rising above eight per cent—an error that the Republicans have been gleefully exploiting ever since.

President Obama didn’t go into this history. During his admirably crisp and punchy speech, the word “stimulus” didn’t cross his lips. But make no mistake: that is what he was proposing. If Congress were to pass the American Jobs Act without amendment (a fanciful thought), the federal government, over the next year, would inject into the economy roughly two hundred and fifty billion dollars in tax cuts, sixty billion in extended unemployment benefits for people who have been out of work for more than six months, and a hundred and forty billion in additional spending on teachers, schools, and transportation projects.

All told, the proposals add up to four hundred and fifty billion dollars, a considerable sum. But more than half of that outlay is necessary merely to make policy comply with an economic version of the Hippocratic oath: Do no harm to the bottom line. Why is that? In December, with the stimulus fast running down, the White House and Congress extended unemployment benefits and cut the employee portion of the payroll tax. If these policies are allowed to expire at the end of this year, which is what some Republicans have been calling for, American businesses in 2012 will face a spending shortfall of roughly two hundred and fifty billion dollars. With the economy already teetering, that could bring on another slump.

It took the President a long time to acknowledge such a danger. Rather than heed the advice of Christina Romer, the former head of his Council of Economic Advisers, that the economy needed additional support, he pivoted toward deficit reduction. In his 2010 State of the Union address, he said, “Families across the country are tightening their belts and making tough decisions. The federal government should do the same.” As a political slogan, this little homily has its attractions. As a guide to policy, it is potentially disastrous. It is precisely because households are reining in their expenditures that the government needs to spend more than it takes in. If the government tries to balance its books prematurely, the most likely outcome will be another downturn. That is what happened in the United States in 1937; in Japan in 1997; and in the United Kingdom in 2010-11.

The President has finally changed tack, promising to pay for his largesse with subsequent spending cuts and tax increases, some of which he will lay out next week in a long-term deficit-reduction plan. The combination of short-term stimulus and long-term fiscal consolidation is precisely what the country needs, and just what congressional Republicans, cheered on by the Tea Party, have previously ruled out. Judging from comments by House Speaker John Boehner and others, however, they may be changing their minds. With polls showing that voters care more about jobs than about any other issue, it seems quite likely that the Republicans will agree to more cuts in payroll taxes and an extension of unemployment benefits.

New spending on schools and infrastructure will be a tougher sell, and that is unfortunate. Investments of this sort create more jobs than tax cuts of equivalent cost, and they add to the economy’s productive potential. A new highway or high-speed rail link between two major cities can boost trade and commerce for generations. But such projects, because they appear in the part of the budget labelled discretionary spending, are usually the first to be cut in a period of austerity. In this area, Republican obstructionism seems certain to continue.

Still, in returning to the practice—if not explicitly the theory—of stimulus spending, the President has taken an important step in the right direction. The fate of the economy still depends on many things that aren’t under his control: oil prices, more monetary stimulus from the Fed, and a resolution of the European debt crisis. (On Wall Street, reaction to Obama’s speech was overshadowed by the resignation of a member of the European Central Bank.) But, going into an election year, the President can say that he has presented a credible proposal to create jobs and give the economy a boost. Which Republican candidate can make the same claim? Perry, with his support for a balanced-budget amendment? Mitt Romney, with his fifty-nine-point plan to slash federal spending, make a bonfire of federal regulations, and impose trade sanctions on China? Herman Cain, with his “9-9-9” plan? As far as the unemployed are concerned, the answer is clear. ♦